Bond yields fall 1 bps ahead of RBI policy announcement

Bonds

Indian benchmark bond yields opened one basis point (bp) lower on December 5 ahead of the Reserve Bank of India's (RBI) monetary policy announcement. The 10-year government security yield opened at 6.5 percent, down from its previous close of 6.51 percent.

Market experts said traders would be closely watching RBI’s CPI inflation forecast and any liquidity measures such as OMO to be announced, which would help bond yields to rise.

On December 5, Moneycontrol reported that RBI’s sustained efforts to defend the rupee has tightened liquidity in the domestic banking system, leading the bond market to price in the possibility of an Open Market Operation (OMO) to purchase of government securities ease liquidity.

If announced, OMO purchase will provide liquidity to the banking system, which would ease bond yields and short-term money market rates.

An OMO is the sale or purchase of government securities by the RBI to manage rupee liquidity and bond yields.

The central bank has so far conducted Rs 27,280 crore worth of OMO purchases in the secondary market. It includes Rs 14,810 crore purchased between November 10 and November 13, and Rs 12,470 crore between November 4 and November 7, RBI data shows.

On November 21, a Moneycontrol poll of economists, treasury heads and fund managers said the RBI’s MPC is likely to cut repo rate by 25 basis points (bps) due to the comfort provided by the lowest ever Consumer Price Index (CPI) inflation in the last two months.